Mon 9 Apr 2007
The following is an excerpt from the article “Talking Shopping Center” by Tom Hanchett.
The thing that struck me as I started my research was how long it took for that idea to catch on. Despite wide publicity for that first one [Country Club Plaza in Kansas City], shopping centers remained a rarity for thirty years. The problem was cost. Erecting a big new shopping center made economic sense only in very well-to-do neighborhoods. If you’re a real estate developer, it makes much more sense just to sell house lots because you get your money back immediately. You have to operate a shopping center for many years before you make a profit. In Kansas City, the developer was already making a bundle of bucks from his lot sales and he figured he could sell even more houselots by building that shopping center — as an attraction, a loss leader.
Not until the mid 1950s did shopping centers appear in any numbers. The first enclosed shopping mall is generally considered to be Southdale Mall, built in 1956 outside of Minneapolis. Then suddenly shopping centers take off, and they’re EVERYWHERE. Why then? Why so suddenly?
Historians have tended to offer three interrelated explanations: rise in use of automobiles, general residential suburbanization, and white flight. I looked at three very different cities, Charlotte, North Carolina, Cortland, New York, and Scranton / Wilkes Barre, Pennsylvania, to see if those factors explained the exponential rise in shopping plaza construction. None did.
For instance, automobiles — clearly the shopping center exists to serve the auto, but auto ownership was high in all three cities long before shopping centers popped up around the end of the 1950s. I could find no “tipping point” in absolute numbers or per capita number of cars — no magic number across the three cities when cars began to “require” shopping centers.
Same with suburbanization and white flight. Again, suburbanization of housing does set the stage for the shopping center; well-to-do customers were moving to the suburbs and the stores wanted to follow them. But rate of suburban growth had nothing to do with timing of centers in my three cities. Charlotte grew great guns in the 1950s and 60s, Cortland was a town of 20,000 people and always has been, and Scranton / Wilkes Barre LOST population steadily throughout this entire period, both in the city and in the suburbs. Yet in all of those places, whether there was suburban growth or not, shopping centers came around the end of the ’50s. White flight also fails as an explanation: in both Cortland and Scranton / Wilkes Barre, the percentage of African-Americans remained constant at around one percent. So clearly something else was going on.
The explanation is quite unexpected: a change in tax laws. By accident the federal government began subsidizing new shopping center construction.
In 1954, Congress passed a change in the tax law, something called “accelerated depreciation.” Republicans controlled the Presidency and both houses of Congress, and very much wanted to use government to help business. There was a small recession on and they wanted to get people to invest in manufacturing, so they offered a tax break intended to spur factory construction. It turned out because of a quirk in the language that the law applied not just to factories but to any “income-producing” building.
You see, the tax code had always given a write-off toward the cost of replacing business buildings. Any factory or store will eventually wear out. It needs a new roof, this or that needs replacing. From its inception in the 1910s, the US tax code allowed businesspeople to deduct a certain percentage of their building’s value each year so that at the end of so many years they would have enough money to replace the building. Typically forty years was considered the “useful life” of a structure. You deducted 1/40th of the building’s value each year; instead of paying it in taxes, you got to hold onto it, with the intent that you’d put it under your mattress and save it toward the day the building needed repairs or replacement.
In 1954, Congress greatly accelerated that depreciation timetable, so that you could take twice as big a tax break in the early years. But nothing said you actually had to use the money for renovating the building, so it became tax-free income. The acceleration clause was so powerful that on paper it could look like you were losing money on your building for years even though the building’s value was going up. In fact, you could claim losses even in excess of the amount of profit you were making on the building, and you could apply those losses to other kinds of income. You could use them as a “tax shelter.”
So in the mid-50s, commercial real estate became a tax shelter — you built in order to get these paper losses and shelter other kinds of income. Accelerated depreciation produced an unintended boom in ALL types of commercial construction. Especially in suburbia. You could only get the full write-off on new construction, not renovation of an existing structure. And depreciation applied only to buildings and not to land. So you wanted to spend very little for land and a great deal on the building so you could get the biggest tax break. And where was land cheapest and new construction easiest? The math pushed developers towards the edge of town.
The economic logic of the tax law spurred all sorts of new kinds of suburban development. There’s a tremendous boom in suburban apartments that starts in the late 50s. There’s a tremendous boom in suburban office development. America’s first office park pops up in 1955 and within a decade there are office parks all over the place. Same situation with industrial parks. Investors are looking for tax shelters so now they build whole new factory districts on the edge of town.
The central point of my research, I’d say, is the discovery that US shopping centers did not supplant downtowns purely because “the public demanded them.” Customers certainly liked the easy free parking and the newness of the mall, but federal tax subsidies played a big role as well. Can we measure how many shopping centers met real demand and how many were built just for investment purposes? Well, if you compare the United States to Canada (particularly Ontario, which had similar numbers of cars and suburbanization to the US) you find that the countries had virtually the same number of shopping centers per capita in the mid-50s — before the US tax change. But by the end of the 60s, the United States had twice as many per capita. If you wanted to extrapolate from that, you could say that perhaps half of American shopping centers were genuinely desired and the other half were to some extent the result of this tax break.
The triumph of the shopping center had wide ripple effects on American habits and lifestyles. For one thing, structures built under accelerated depreciation were intended to be disposable. You reaped the tax break as long as the law allowed, usually seven to fifteen years, then unloaded the project. So builders got out of the habit of building for the ages and instead perfected construction techniques to match the tax timetable — you could buy “fifteen year” or “thirty year” roofs, for example. Today dead and dying shopping plazas are a major suburban blight in most American cities. I lived in Atlanta for a year, in a quite desirable suburb, and within a mile of my house there were three struggling shopping centers riddled with vacant space because new centers had opened further out in the ’80s and pirated the tenants.
… Accelerated depreciation was thus the engine behind a sweeping new pattern of urban development. Most downtowns remained alive and healthy until the 60s, but when these new suburban downtowns came into being, the old downtown nosedived into decline. Sometime around 1960, geographers began to notice — academics love to invent labels — that shopping center development had turned from “consequent” to “catalytic.” Consequent meant you built shopping in the middle of customers’ houses. Because of the federal subsidy in the form of a tax break, though, it now became economical to move out beyond the city and to build a new downtown. In the late 50s or early 60s, development became catalytic, where developers started going out way beyond the edge of town and erecting shopping centers in the cornfields. Suburban office parks and apartment complexes followed. This is the beginning of what we now call “edge city.”
The edge city phenomenon became unmistakable after 1981, when the Reagan Congress changed the depreciation structure to allow write-off of a building not in forty years, but in fifteen years. From 1981 to 1986 when that break was repealed, America saw tremendous overbuilding. The tax incentive was such that in Texas, for instance, they start talking about “see-through” office buildings, where developers built purely to get the tax break — they’d earn money even if the space never rented.
This article was originally published in Long Term View, the public policy journal of the Massachussetts School of Law at Andover. The article was written with the assistance of journalist Nancy Bernhard. A complete version of the article is online in the “Positions” section of Cloud-Cuckoo.net.
A more academic treatment of this topic, by the same author, is:
Hanchett, Thomas W., “U.S. Tax Policy and the Shopping-Center Boom of the 1950s and 1960s.” The American Historical Review, Vol. 101, No. 4 (Oct., 1996), pp. 1082-1110.
Journalist Malcolm Gladwell drew on Hanchett’s research for The Terrazzo Jungle, an essay on the planning history and failed ideals of suburban malls.